The California State Auditor’s Office on Thursday, Oct. 24, unveiled a comprehensive ranking of 471 cities based on fiscal health, and nearly 40 percent of the cities deemed a “high risk” are in Los Angeles County, according to the ranking.

Compton was ranked the lowest of any city in the state, based on indicators such as debt levels, pension funding and reserve balances. Seven of the 18 cities facing “significant financial distress” are in L.A. County, one each is in Riverside and Orange counties and none is in San Bernardino County.

“We assessed risk by performing various financial comparisons and calculations that could indicate the potential for fiscal distress, and we analyzed things such as a city’s cash position or liquidity, debt burden, fiscal reserves, revenue trends, and ability to pay for employee retirement benefits,” state Auditor Elaine Howle said.

“We ensured the rigor behind our approach by establishing and engaging an advisory panel of experts in municipal fiscal health,” she said. “We are confident that our assessment will help distressed cities get in front of impending challenges.”

Howle’s office developed the ranking over the last year as a public awareness tool through the agency’s high-risk local government audit program. The complete ranking, based on fiscal year 2016-17 data, is available on the auditor’s website.

“We wanted to put this together not only for policymakers, decision-makers at the state and local level, but we wanted people in the communities, the people who reside in these cities, to really understand how fiscally healthy their cities are,” Howle said at a news conference Thursday morning.

Locally, the cities deemed “high risk” are Compton, Blythe, San Fernando, San Gabriel, Maywood, Monrovia, Vernon, West Covina and La Habra. Several other Southern California cities, including Torrance and Riverside, were among the top 25 most fiscally challenged.

The assessment scored each city using 10 factors, six of which focused on a city’s ability to pay skyrocketing pension and post employment benefits.

For example, the city of San Fernando showed positive revenue trends, but did not have enough reserves, or money set aside for its obligations to retirees. Vernon, the very business-friendly city near South L.A., scored well on its obligations, but poorly on how much cash it has on hand, its reserves and its debt burden.

The other end of the spectrum had fewer surprises. Lake Forest, Indian Wells, Rolling Hills and La Mirada were among the cities with the best fiscal health.

Robert Fellner, executive director of Transparent California, a public pay database, applauded the state auditor’s new website.

“The elected officials in these distressed cities are not going to be able to claim ignorance when things blow up a few years down the road,” Fellner said. “They should be proactive now that the state is officially shining a light on this.”

If a recession hits, some cities will have to raise taxes and cut services, Fellner said.

“By the time it becomes clear that it’s a problem, it’s too late to have dealt with it responsibly,” he said.

Compton’s fiscal health the lowest

The state auditor singled out Compton because of the city’s lack of transparency about its finances.

State Controller Betty Yee audited Compton in 2018 and found the city’s general fund deficit was caused by reckless overspending, pervasive internal control deficiencies and a lack of City Council oversight. Of the 79 accounting and administrative controls reviewed, Compton was deficient in 71, the state controller found.

The city’s spending was three times that of comparable charter cities in L.A. County and its compensation for elected officials exceeded the limits set by its charter by nearly $1.3 million over a seven-year period.

Those weak controls allowed a former deputy treasurer to embezzle more than $3.7 million from May 2010 to December 2016. He was sentenced to 6 1/2 years in prison as a result.

In May, Mayor Aja Brown said the city is committed to addressing the controller’s fiscal concerns and is making progress.

“We are looking forward to continuing to move forward with greater fiscal strength and transparency,” he said in a statement at the time.

Rising costs of employee benefits

The rising costs of pensions and other post-employment benefits, in particular, seemed to put dozens of cities’ financial futures in danger. More than 130 cities were struggling to set aside the money necessary to meet pension obligations, according to the auditor.

The number of public employees collecting pensions exceeding $100,000 in California jumped from 1,841 people in 2005 to more than 26,000 in 2018, according to an analysis of CalPERS data by the Southern California News Group.

Howle called it “concerning” that many cities are now floating bonds to pay for pensions.

“They are taking on debt to pay some of their pension benefits and that’s not a good place for anybody to be,” she said.

Earlier this year, an investigation by SCNG found Inglewood shifted $36 million from a pension obligation bond to its general fund in 2017. Experts called the diversion of the money “wholly inappropriate” and extremely risky.

Inglewood, the future home of the Los Angeles Rams and Chargers, was listed as a moderate risk and ranked 49 out of 471 cities. It fared better in the ranking than Los Angeles, Torrance and Long Beach.

It’s not just pensions that threaten to sink California’s cities.

More than 70 percent of the cities in California do not have any funds set aside for other post-employment benefits, such as retiree health care, according to Howle.

“The cities are going to have to figure out how to pay for those benefits and, unfortunately, the answer may be that they’re going to have to cut services,” she said.

What happens next?

The auditor said she will send teams to the high-risk cities to determine whether the local governments have plans in place to handle their troubling finances. If not, Howle will ask the Joint Legislative Audit Committee for permission to conduct an official audit of those cities and to recommend corrective actions.

The local government audit program was created in response to the Bell scandal that began to unfold in 2010.

Howle’s office plans to update the ranking annually, and is already collecting audited financial statements for the 2017-18 fiscal year.

“Once we have all of that information from all of the cities, we will update this database and we will start to look at trends,” she said.

Jason Henry is an investigative reporter with the Southern California News Group. Raised in Ohio, Jason began his career at a suburban daily near Cleveland before moving to California in 2013. He is a self-identified technophile, data nerd and wannabe drone pilot.

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